What Are High Yield Bonds?
High yield bonds are corporate securities with credit ratings below investment grade. To attract investors, non–investment grade companies usually pay higher interest rates than issuers deemed to be more creditworthy, so their bonds are called “high yield.” High yield bonds can be used to diversify an investment portfolio because their performance has a low correlation with most asset classes, especially investment grade bonds such as Treasuries and high grade corporate debt. Like stocks, high yield bond prices are more sensitive to the economic outlook and corporate earnings than to day-to-day interest rate fluctuations. While high yield bonds share some behavioral characteristics with stocks, their overall returns should be less volatile because their income is generally much higher.
Credit analysis is central to high yield bond investing. It focuses on individual characteristics and fundamentals of issuers as well as the downside risk of default. The broad high yield market is diversified by industry group and issue type. Today’s vast global high yield market can enable portfolio managers to achieve extensive diversification by region, industry and issuer, as well as by the individual issue within a firm’s capital structure. By actively managing portfolios, PIMCO seeks to lower portfolio volatility while enhancing returns.